Westpac's Elliot Clarke has pencilled in US70¢ for the second half of 2019 and says that an interest rate cut from the Reserve Bank of Australia could be one factor that would take the currency further below that estimate.
Mayu Kanamori

"We haven't a massive reaction to the tariffs," according to NAB's Rodrigo Catril. "The lack of news has translated as good news."

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NAB doesn't expect the calm to last. "We still think it's a matter of time before the US makes another announcement on tariffs," Mr Catril says. "Generally we think that things are going to get worse before they get better for the Australian dollar."

The Australian currency is the most susceptible of the G10 currencies to bad news on trade, NAB's Mr Catril notes, as it's highly liquid and investors tend to express their views on emerging market risk via the Australian dollar.

That risk has risen as the deteriorating trading relationship between the US and China threatens the performances of emerging market economies which are generally tied to China, he says. "The Australian dollar gets caught up in that."

"Trade disputes between the US and world ex-US have caused immense uncertainty in recent months. We do agree with this apprehension, noting that a 1 percentage point decline in global trade has historically reduced copper prices by around 4 percentage points," according to Bank of America Merrill Lynch's global commodity research team.

"These numbers may sound small, but putting them into context, if global trade growth fell from April's 4.4 per cent year-on-year to the 2015/16 average of 1.7 per cent, copper prices could correct by 10.8 per cent year-on-year to $5,100 a tonne."

While trade tensions have weighed on the Australian currency of late, it has been on a downward path for most of the year.

The losses were made as the interest rate relationship between the US and Australia changed, says Stephen Roberts at Laminar Capital, who sees the currency at US70¢ in six months' time.

At the start of the year, Australian bond yields were above US bond yields but that situation changed as market expectations for US interest rate rises firmed while expectations for interest rate rises in Australia were scaled back.

The difference between Australian and US interest rates could be 50 basis points or more by the end of the year, Mr Roberts says, adding "that's a pretty powerful driver".

The widening rate differential also helps to explain why the Australian dollar hasn't drawn greater support from relative strength in commodity prices this year, he said.

Westpac's Elliot Clarke has pencilled in US70¢ for the second half of 2019 and says that an interest rate cut from the Reserve Bank of Australia could be one factor that would take the currency further below that estimate.

"This option would only be taken if the labour market deteriorated hence, negating a hoped-for improvement in wage and consumer price inflation," he says.

The relative strength of government finances supports the country's AAA rating. As Australia is one of a few sovereign countries to retain the top rating, investors looking for safe-havens for their money can be attracted to Australia.